The Looming Crisis for America's Hospitals

Having formerly lived in the Chicago area for years, I was shocked to hear that the city's oldest and most famous hospital, Michael Reese, had shuttered its doors in 2009.  Some think that the upkeep on this 120 year old facility was just too costly to maintain.  But, there was another set of reasons that were best explained by documentarian, Arlen Parsa, in the piece titled "Waiting for Michael Reese":

Located on the South Side of Chicago, many of Michael Reese's sick patients were not able to afford the care they received. A substantial number of the hospital's patients relied on government programs like Medicare (for the elderly) and Medicaid (for the poor) to cover their care expenses, but the reimbursement rates that the federal government provides for these has been insufficient for years. This is a problem that hospitals around the country have struggled with, particularly those in urban areas (the uninsured population on Chicago's South Side for instance is twice the national average and is growing).

So, clearly, Michael Reese -- which operated in an aging and increasingly poor minority inner city area of Chicago -- found itself being starved of funding because of a high charity patient load and too many whose only insurance was either the underpaying Medicaid (for the poor and disabled) or Medicare (for the retired, older American).  This will be a challenge for many hospitals in the country that are operating anywhere but among the younger and more affluent areas.

First of all, Americans are living longer and, as a consequence, are in need of increased hospital care in their later years.  As a result, the Medicare rolls are expected to increase substantially:

Medicaid, too, underpays.  Because of the slow recovery from the recession and the lack of good paying jobs and because of the expansion of Medicaid under ObamaCare, there are now nearly 70 million Medicaid enrollees; or, approximately 22% (more than 1 in 5) of our population.  And, it is expected that Medicaid will add another 10 million to its rolls by 2020.  Also, that number would be even greater if 22 states hadn't refused to expand Medicaid under ObamaCare.

A recent survey conducted by the American Hospital Association found that, on average, 58% of the patients treated in 2013 were insured by either Medicaid or Medicare.  On average, hospitals were only reimbursed 88 cents on the dollar for Medicare and 90 cents for Medicaid.  When it comes to Medicaid, there's an additional problem: State budgets. In all 50 states, Medicaid is the highest expenditure just behind education. So, when it comes to budgeting and politics, Medicaid tends to get cut before education.  In 2012 alone, 13 states cut the Medicaid budget in order to balance their budgets.  This is a trend that will only get worse and the current 90 cents on the dollar will only get lower.

For the hospitals, there is another problem and that's the uninsured which may, most likely, wind up as charity cases if they can't reimburse a hospital for their care.  Despite 2 years of ObamaCare enrollment, the number of uninsured is still high at 41 million (12.9% of a population of 320 million).  While that number is expected to drop to 31 million by 2016; the Congressional Budget Office expects that it will remain at that level for years forward.

ObamaCare insurance policies (sold in the exchanges) are also hurting the hospitals profit models.  Most people don't understand that the ObamaCare insurance plans are either Health Maintenance Organizations (HMO's) or Preferred Provider Options (PPO's).  What this simply means is that doctors and hospitals, in order to be plan eligible, must agree to treat their insured patients at prices less than their normal rates.  This is why so many -- who have been forced off their private insurance and into ObamaCare -- can't find their former doctors or hospitals.  And, the problem of hospitals losing full-fare private and employer-provided insurance is only going to get worse.  This year, as many as 12 million may signup for ObamaCare's insurance plans, but, in 2010, the Obama Administration predicted that 93 million insured would lose their private and employer-based insurance and will be forced to buy underpaying policies in the exchanges.

Another way that ObamaCare is hurting hospital profit margins is the 3.2% Medical Device Tax.  While the tax may affect veterinarians and doctors, the greatest impact will be on hospitals which, daily, must buy disposable medical equipment like surgical gloves, irrigation needles and syringes, plastic procedure sets, etc.   But, medical device tax also includes the replacement or upgrade of defibrillators, EKG's, and MRI's.   While the tax, itself, seems like a small amount at 3.2%, when taken against a $110 billion/year industry, its an additional $3.2 billion/year that most hospitals will have to pay to stay in business.  If a hospital is already struggling financially, this tax may could possibly be what finally forces it to close down.

The bottom line is that many hospitals in this country -- especially those in the inner cities and in rural America -- are going to shut their doors unless they are paid above their costs for medical services they render.  As usual it will be the poor and elderly who will be hurt the most.  Additionally, all of us will suffer because fewer hospitals will only increase wait times and seriously reduced bed availability for those hospitals that are able to remain open.  Also understand, that those hospitals that do close because of underpaying patients, will be pushing those problem patients to stable hospitals that, as a result, might then find themselves, too, in financial trouble.  So, in essence, this could cause the problem to spiral out of control.

References:

Waiting for Michael Reese: http://waitingformichael.com/about-reese.html

Hospitals, doctors moving out of poor city neighborhoods to more affluent areas: http://www.jsonline.com/news/health/hospitals-doctors-moving-out-of-poor-city-neighborhoods-to-more-affluent-areas-b99284882z1-262899701.html

Medicaid Enrollment: http://kff.org/health-reform/state-indicator/total-monthly-medicaid-and-chip-enrollment/

Medicare Medicaid Underpayments: http://www.aha.org/content/15/medicaremedicaidunderpmt.pdf

13 States Cut Medicaid To Balance Budgets: http://kaiserhealthnews.org/news/medicaid-cuts/

22 States Are Refusing to Expand Medicaid: http://www.whitehouse.gov/share/medicaid-map

If you loathed HMOs, you're not going to like Obamacare: https://www.aei.org/publication/if-you-loathed-hmos-youre-not-going-to-like-obamacare/

Health Plan Types: HMO or PPO? - Obamacare Facts: http://obamacarefacts.com/health-plan-types-hmo-ppo/

Gallup: Uninsured Rate at 12.9%: http://www.gallup.com/poll/180425/uninsured-rate-sinks.aspx

CBO Graph: Projected Uninsured Rate Through 2025: http://www.newrepublic.com/sites/default/files/u18524/coverage_-_what_cbo_really_said.png

Obama Officials In 2010: 93 Million Americans Will Be Unable To Keep Their Health Plans Under Obamacare: http://www.forbes.com/sites/theapothecary/2013/10/31/obama-officials-in-2010-93-million-americans-will-be-unable-to-keep-their-health-plans-under-obamacare/

ObamaCare Shuttering Hospitals and Free Clinics: http://www.thenewamerican.com/usnews/health-care/item/19726-obamacare-shuttering-hospitals-and-free-clinics

Rural hospitals in critical condition - USA Today: http://www.usatoday.com/story/news/nation/2014/11/12/rural-hospital-closings-federal-reimbursement-medicaid-aca/18532471/

Medical Device Industry: http://selectusa.commerce.gov/industry-snapshots/medical-device-industry-united-states